March 27. The Financial Accident clock ticks closer to midnight
–EUR making new low 128.11. (5:15am Chicago time). News out of the EU continues to be bleak: Bank of Portugal yesterday cut growth forecast to -2.3 from -1.9. Bank of Spain cut forecast to -1.5; official gov’t forecast was -0.5. Cyprus yesterday announced plans to increase emergency credit by €2.5-3.0b. Italy Industrial orders in Jan -1.4%, third consecutive decline, and the political situation there is no closer to resolution.
–From a BBG piece: “The loans include one linked to the difference between the 10-year British pound constant-maturity-swap and the 6-month Japanese benchmark…” Sounds like high finance for a hedge fund right? Nope, that would be terms of a loan taken by a French municipality issued by Dexia. The gyst of the article is that many towns in France are seeking help from the state due to the burden of these bad loans. WTF is a town in France doing with a loan like this??!! I don’t understand it, and I am tangentially associated with the financial industry. And of course the larger question is: How much of this stuff is out there? How can an uninsured depositor know?
Here’s the link http://www.bloomberg.com/news/2013-03-27/france-s-towns-demand-rescue-from-time-bomb-of-dexia-loans.html
–Continued underlying bid in treasuries (5 yr auction today), accompanied by lower vols going into the long weekend. TYK 131.5 straddle opened 116 bid, settled 111, which I marked at 3.8 vol. Swap spreads push higher. Ten yr swap spread started March around 8 bps, now 15.5 (+1.75 bp yesterday). Another new low in 10yr JGB, 52 bps. I didn’t read it but FT has this headline: “Global pool of triple A status shrinks 60%”. Which gives context to a yield of only 5.56% for high yield bonds (Barclays)….doesn’t seem like there’s much risk cushion there.
–US stocks also remain bid. I suppose global portfolio managers see the US as a safe haven, not only from the EU, but other markets as well. For example Brazil is down 12% since the high from the beginning of the year. Hong Kong is down 6% since late Jan high. Nikkei up up over 30% since Dec, but in a currency that the gov’t is bound and determined to destroy.
–It’s not that Cyprus is big economically, it’s the official clumsy response that saps confidence (and gums up the lubricant of the global financial system). A country that had 50% of its economy in banking is being cut in half in an instant. In the US, the govt can’t even decide to cut Saturday mail delivery without hang-wringing and soul searching. The next crisis is closer than it appears in your mirror. And it is coming at a time when central bankers have already expended the elixir of low rates. I never thought the low of 140ish in the US ten year would be revisited, but now I’m not so sure…strap in for safety.
